EXPOSURE DRAFT PROPOSED STATEMENT ON STANDARDS FOR ACCOUNTING AND REVIEW SERVICES

Transcription

1 EXPOSURE DRAFT PROPOSED STATEMENT ON STANDARDS FOR ACCOUNTING AND REVIEW SERVICES OMNIBUS STATEMENT ON STANDARDS FOR ACCOUNTING AND REVIEW SERVICES OCTOBER 9, 2007 Prepared by the Accounting and Review Services Committee American Institute of Certified Public Accountants Comments should be sent by electronic mail to Michael Glynn at mglynn@aicpa.org and received by December 28, 2007.

2 Copyright 2007 by American Institute of Certified Public Accountants, Inc. Permission is granted to make copies of this work provided that such copies are for personal, intraorganizational, or educational use only and are not sold or disseminated and provided further that each copy bears the following credit line: Copyright 2007 by American Institute of Certified Public Accountants, Inc. Used with permission.

3 October 9, 2007 Accompanying this letter is an exposure draft of a proposed Statement on Standards for Accounting and Review Services (SSARS), Omnibus Statement on Standards for Accounting and Review Services A summary of the significant provisions of the proposed SSARS follows this letter. Comments or suggestions on any aspect of this exposure draft will be appreciated. To facilitate the Accounting and Review Services Committee s consideration of responses, comments should refer to specific paragraphs by number and include supporting reasons for each suggestion or comment. Please note that the exposure draft reflects the revisions to SSARSs as a result of the issuance of SSARS No. 15, Elimination of Certain References to Statements on Auditing Standards and Incorporation of Appropriate Guidance Into Statements on Standards for Accounting and Review Services. Written comments will become part of the public record of the AICPA and will be available for public inspection at the offices of the AICPA after February 1, 2008, for one year. Comments should be sent via electronic mail to Michael Glynn at mglynn@aicpa.org and received no later than December 28, Sincerely, Thomas A. Ratcliffe Chair Accounting and Review Services Committee Charles E. Landes Vice President Professional Standards

4 Accounting and Review Services Committee ( ) Thomas A. Ratcliffe, Chair Richard DelGaudio Martin C. Levin Joseph A. Maffia Douglas S. Mathison Carolyn H. McNerney Walter H. Webb Accounting and Review Services Committee ( ) Thomas A. Ratcliffe, Chair Cassandra Camp Richard DelGaudio Martin C. Levin Joseph A. Maffia Douglas S. Mathison Carolyn H. McNerney AICPA Staff Charles E. Landes Vice President Professional Standards Michael P. Glynn Technical Manager Audit and Attest Standards

5 SUMMARY The attached is an exposure draft of a proposed Statement on Standards for Accounting and Review Services (SSARS) entitled, Omnibus Statement on Standards for Accounting and Review Services WHY ISSUED AND WHAT IT DOES The proposed statement will accomplish the following: Revise AR section 100, Compilation and Review of Financial Statements; AR section 200, Reporting on Comparative Financial Statements; and AR section 300, Compilation Reports on Financial Statements Included in Certain Prescribed Forms (AICPA, Professional Standards, vol. 2), to conform to the terminology utilized by other standard setters, including the Auditing Standards Board, by replacing the term nonpublic entity with the term nonissuer. Generally, a nonpublic entity as currently defined in AR section would be considered a nonissuer under the revised definition. Revise AR section 100 to clarify the objective of a compilation of financial statements as an engagement in which no assurance is provided. Furthermore, new sections entitled, Objective of a Compilation Engagement and Objective of a Review Engagement, will be established to clearly indicate the differences between compilation, review, and audit engagements. The clarified objectives of the respective engagements will be included in the illustrative engagement letter for a compilation of financial statements (Appendix C of AR section 100), the illustrative engagement letter for a compilation of financial statements not intended for third party use (Appendix D of AR section 100), and the illustrative engagement letter for review engagements (Appendix E of AR section 100). This amendment also revises AR section to state that, in a review engagement, the accountant must (1) apply analytical procedures to the financial statements; (2) make inquires of management and, when deemed appropriate, other company personnel; and (3) obtain representations from management for all financial statements and periods covered by the accountant s review report. AR section is also revised to properly state the above requirement with respect to analytical procedures. Revise the definition of third party in AR section to clarify that the phrase, who are knowledgeable about the nature of the procedures applied and the basis of accounting and assumptions used in the preparation of financial statements applies to members of management, and also, to introduce a definition of management. Revise AR section and to state that since review procedures include obtaining representations from management that they have taken responsibility for all financial statements and periods covered by the accountant s

6 review report, and since the accountant s review report should be dated as of the completion of the accountant s review procedures, as well as the fact that the accountant is concerned with events occurring through the date of the review report that may require adjustment to or disclosure in the financial statements, management s written representations should be made as of the date of the accountant s review report. Provide guidance with respect to an accountant s consideration of the entity s ability to continue as a going concern during the performance of compilation or review procedures. Provide guidance with respect to an accountant s consideration of subsequent events in a compilation or review engagement. AR section (Supplementary Information) states that the review has been made primarily for the purpose of expressing limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles. In order to clarify the guidance in Statements on Standards for Accounting and Review Services, the word primarily will be deleted from the paragraph. Incorporates guidance with respect to analytical procedures in a review engagement as an exhibit to AR section 100. EFFECTIVE DATE Certain sections of the proposed statement would be effective for compilations and reviews of financial statements for periods ending on or after December 15, Early application would be permitted. Certain other sections of the proposed standard would be effective upon issuance. HOW IT AFFECTS EXISTING STATEMENTS ON STANDARDS FOR ACCOUNTING AND REVIEW SERVICES The proposed statement would amend AR sections 100, 200, 300, and 400. In addition, the following interpretations are anticipated to be affected: Revise Interpretation No. 3, Reporting on the Highest Level of Service, of AR section 100 by replacing the term nonpublic entity in AR section with nonissuer. Revise Interpretation No. 4, Discovery of Information After the Date of the Accountant s Report, of AR section 100 by replacing the term nonpublic entity in AR section b with nonissuer.

7 Revise Interpretation No. 5, Planning and Supervision, of AR section 100 by replacing the term nonpublic entity in AR section and in AR section with nonissuer. Revise Interpretation No. 10, Reporting on Tax Returns, of AR section 100 by replacing the term nonpublic entity in AR section with nonissuer. Revise Interpretation No. 15, Differentiating a Financial Statement Presentation From a Trial Balance, of AR section 100 by replacing the term nonpublic entity in AR section with nonissuer. Revise Interpretation No. 20, Applicability of Statements on Standards for Accounting and Review Services to Litigation Services, of AR section 100 by replacing the term nonpublic entity in AR section a with nonissuer. Revise Interpretation No. 27 Applicability of Statements on Standards for Accounting and Review Services to Reviews of Nonissuers Who Are Owned by or Controlled by an Issuer of AR section 100 to replace the defined term nonpublic entity with the new definition of nonissuer. Interpretation No. 1, Omission of Disclosures in Financial Statements Included in Certain Prescribed Forms, to AR section 300 is also anticipated to be affected by replacing the term nonpublic entity in AR section with nonissuer.

8 PROPOSED STATEMENT ON STANDARDS FOR ACCOUNTING AND REVIEW SERVICES OMNIBUS STATEMENT ON STANDARDS FOR ACCOUNTING AND REVIEW SERVICES Amendment to AR Section 100, Compilation and Review of Financial Statements (AICPA, Professional Standards, vol. 2, AR sec , , ), AR Section 200, Reporting on Comparative Financial Statements (AICPA, Professional Standards, vol. 2, AR sec , , ), AR Section 300, Compilation Reports on Financial Statements Included in Certain Prescribed Forms (AICPA, Professional Standards, vol. 2, AR sec ), and AR Section 400, Communications Between Predecessor and Successor Accountants (AICPA, Professional Standards, vol. 2, AR sec ) Replacement of term nonpublic entity with nonissuer. 1. AR section 100, Compilation and Review of Financial Statements sets forth the performance and communication requirements when an accountant submits unaudited financial statements of a nonpublic entity to his or her client or third parties. This amendment revises AR section 100 by replacing the term nonpublic entity with nonissuer. This revision conforms to the terminology utilized by other standard setters, including the Auditing Standards Board. New language is shown in boldface italics; deleted language is shown by strikethrough. Note that only those definitions in AR section that are revised, deleted, or added as a result of this amendment are reflected below. All other definitions are unchanged..01 This section sets forth the performance and communication requirements when an accountant submits unaudited financial statements of a nonpublic entity nonissuer to his or her client or third parties. The accountant should not submit unaudited financial statements of a nonpublic entity nonissuer to his or her client or a third party unless, as a minimum, he or she complies with the provisions of this section applicable to a compilation engagement. a. Compilation of financial statements. 1 If the accountant performs a compilation, a communication to management is required. The type of communication depends on the following. 1. If the accountant is engaged to report on compiled financial statements or submits financial statements to a client that are or reasonably might be 1 See Appendix A [paragraph.84.97], Compilation of Financial Statements, for a flowchart describing regarding the requirements of Statements on Standards for Accounting and Review Services (SSARSs) for a compilation engagement.

9 expected to be used by a third party, see paragraphs for reporting requirements. 2. If the accountant submits financial statements to a client that are not reasonably expected to be used by a third party, see paragraphs for required communications to management. In deciding whether the financial statements are or reasonably might be expected to be used by a third party, the accountant may rely on management s representation without further inquiry, unless information comes to his or her attention that contradicts management s representation. In each of the above circumstances, the performance requirements in paragraphs.05 and.07 through apply. b. Review of financial statements. 2 If the accountant performs a review, see paragraphs.05 and.26 through for performance and reporting requirements..03 An accountant should not consent to the use of his or her name in a document or written communication containing unaudited financial statements of a nonpublic entity nonissuer unless (a) the accountant has compiled or reviewed the financial statements in compliance with the provisions of this statement or (b) the financial statements are accompanied by an indication that the accountant has not compiled or reviewed the financial statements and that the accountant assumes no responsibility for them. For example, the indication may be worded as follows: The accompanying balance sheet of X Company as of December 31, 20X1, the related statements of income, and cash flows for the year then ended were not audited, reviewed, or compiled by us and, accordingly, we do not express an opinion or any other form of assurance on them. If an accountant becomes aware that his or her name has been used improperly in any client-prepared document containing unaudited financial statements, the accountant should advise the client that the use of his or her name is inappropriate and should consider what other actions might be appropriate, including consultation with his or her attorney. [As amended, effective November 2002, by Statement on Standards for Accounting and Review Services No. 9.].04 Certain terms are defined for purposes of this section as follows. Nonpublic entity. Any entity other than (a) one whose debt or equity securities trade in a public market either on a stock exchange (domestic or foreign) or in the over-the-counter market, including debt or equity securities quoted only locally or regionally; (b) one that makes a filing with a regulatory agency in preparation for the sale of any class of its debt 2 [Footnote deleted by the issuance of Statement on Standards for Accounting and Review Services No. 15, July 2007]

10 or equity securities in a public market; or (c) a subsidiary, corporate joint venture, or other entity controlled by an entity covered by (a) or (b). (See AR section 200, Reporting on Comparative Financial Statements). Nonissuer. All entities except for those defined as issuers. The term issuer means an issuer (as defined in section 3 of the Securities Exchange Act of 1934 [15 U.S.C. 78c]), the securities of which are registered under section 12 of that Act (15 U.S.C. 78l), or that is required to file reports under section 15(d) (15 U.S.C. 78o(d)), or that files or has filed a registration statement that has not yet become effective under the Securities Act of 1933 (15 U.S.C. 77a et seq.), and that it has not withdrawn. Financial statement. A presentation of financial data, including accompanying notes, derived from accounting records and intended to communicate an entity s economic resources or obligations at a point in time, or the changes therein for a period of time, in accordance with generally accepted accounting principles (GAAP) 5 or an OCBOA. 6 Reference in the SSARSs to GAAP include, where applicable, an OCBOA. Financial forecasts, projections and similar presentations, 7 and financial presentations included in tax returns are not financial statements for purposes of this section. The following financial presentations are examples of financial statements and are not meant to be allinclusive: 8 Appropriate GAAP financial statement titles: Balance sheet Statement of income Statement of comprehensive income Statement of retained earnings Statement of cash flows Statement of changes in owners equity Statement of assets and liabilities (with or without owners equity accounts) Statement of operations Statement of revenue and expenses Statement of financial position (condition) Statement of activities Summary of operations Statement of operations by product lines Appropriate OCBOA financial statement titles: Balance sheet cash basis Statement of assets and liabilities arising from cash transactions 5 [Footnote deleted by the issuance of Statement on Standards for Accounting and Review Services No. 15, July 2007] 6 Hereafter, reference to generally accepted accounting principles (GAAP) in this Section includes, where applicable, OCBOA. 7 Statement on Standards for Attestation Engagements No. 10, Chapter 3, Financial Forecasts and Projections [AT section 301], as well as the AICPA Guide for Prospective Financial Information, provide guidance on preparing and reporting on financial forecasts, projections, and similar presentations. 8 [Footnote deleted by the issuance of Statement on Standards for Accounting and Review Services No. 15, July 2007]

11 Statement of assets, liabilities, and stockholders equity income tax basis Statement of revenue collected and expenses paid Statement of revenue and expenses income tax basis Statement of income statutory basis Statement of operations income tax basis A financial statement may be, for example, that of a corporation, a consolidated group of corporations, a combined group of affiliated entities, a not-for-profit organization, a governmental entity, an estate or trust, a partnership, a proprietorship, a limited liability partnership (LLP), a limited liability company (LLC), a segment of any of these, or an individual. The method of preparation (for example, manual or computer preparation) is not relevant to the definition of a financial statement. Communicating to Management and Others The disclosure of any evidence or information that comes to the accountant s attention during the performance of compilation or review procedures that fraud or an illegal act may have occurred to parties other than the client s senior management (or the client s board of directors, if applicable) ordinarily is not part of the accountant s responsibility and ordinarily would be precluded by the accountant s ethical or legal obligations of confidentiality. The accountant should recognize, however, that in the following circumstances a duty to disclose to parties outside of the entity may exist: a. To comply with certain legal and regulatory requirements b. To a successor accountant when the successor decides to communicate with the predecessor accountant in accordance with SSARS No. 4 AR section 400, Communications Between Predecessor and Successor Accountants [section 400], as amended, regarding acceptance of an engagement to compile or review the financial statements of a nonpublic entity nonissuer c. In response to a subpoena Because potential conflicts between the accountant s ethical and legal obligations for confidentiality of client matters may be complex, the accountant may wish to consult with legal counsel before discussing matters covered by paragraph with parties outside the client. Change in Engagement From Audit to Review or Compilation (or From Review to Compilation) An accountant who has been engaged to audit the financial statements of a nonpublic entity nonissuer in accordance with generally accepted auditing standards (or an accountant who has been engaged to review the financial statements of a nonpublic entity nonissuer in accordance with SSARSs) may, before the completion of the audit (review), be requested to change the engagement to a review or compilation (compilation) of financial statements. A request to change the engagement may result

12 from a change in circumstances affecting the entity's requirement for an audit (review), a misunderstanding as to the nature of an audit, review, or compilation, or a restriction on the scope of the audit (review), whether imposed by the client or caused by circumstances. 2. AR section 200, Reporting on Comparative Financial Statements, establishes standards for reporting on comparative financial statements of a nonpublic entity when financial statements of one or more periods presented have been compiled and reported on or reviewed in accordance with AR section 100. This amendment revises AR section 200 by replacing the term nonpublic entity with nonissuer. This revision conforms to the terminology utilized by other standard setters, including the Auditing Standards Board. New language is shown in boldface italics; deleted language is shown by strikethrough.. 01 This statement establishes standards for reporting on comparative financial statements fn 1 of a nonpublic entity nonissuer when financial statements of one or more periods presented have been compiled and reported on or reviewed in accordance with SSARS No. 1 [ AR section 100] fn 2 Reporting When One Period Is Audited.29 When the current-period financial statements of a nonpublic entity nonissuer have been compiled or reviewed and those of the prior period have been audited, the accountant should issue an appropriate compilation or review report on the current-period financial statements and either (a) the report on the prior period should be reissued or (b) the report on the current period should include as a separate paragraph an appropriate description of the responsibility assumed for the financial statements of the prior period. In the latter case, the separate paragraph should indicate (a) that the financial statements of the prior period were audited previously, (b) the date of the previous report, (c) the type of opinion expressed previously, (d) if the opinion was other than unqualified, the fn 1 This statement supersedes Statement on Standards for Accounting and Review Services No. 1, as amended, paragraph [section 100[.79.93]]. [Footnote revised, May 2004, to reflect the conforming changes necessary due to the issuance of Statement on Standards for Accounting and Review Services No. 10.] fn 2 For purposes of this Statement, a nonpublic entity is any entity other than (a) one whose securities trade in a public market either on a stock exchange (domestic or foreign) or in the over-the-counter market, including securities quoted only locally or regionally, (b) one that makes a filing with a regulatory agency in preparation for the sale of any class of its securities in a public market, or (c) a subsidiary, corporate joint venture, or other entity controlled by an entity covered by (a) or (b). This statement amends SSARS No. 1, paragraph 4 [section ], by substituting the foregoing definition of a nonpublic entity. The terms nonissuer, financial statements, compilation, and review are defined in paragraph 4 of SSARS No. 1 [section ].

13 substantive reasons therefor, and (e) that no auditing procedures were performed after the date of the previous report. An example of such a separate paragraph is the following: The financial statements for the year ended December 31, 20X1, were audited by us (other accountants) and we (they) expressed an unqualified opinion on them in our (their) report dated March 1, 20X2, but we (they) have not performed any auditing procedures since that date. Change of Status Public/Nonpublic Entity Issuer/Nonissuer.33 For example, if the entity is a public entity an issuer in the current period and was a nonpublic entity nonissuer in the prior period, a compilation or review report previously issued on the financial statements of the prior period should not be reissued or referred to in the report on the financial statements of the current and one or more prior periods. fn 13 If an entity is a nonpublic entity nonissuer in the current period and was a public entity an issuer in the prior period, the annual financial statements of the prior period may have been audited. fn 14 In these circumstances, the accountant should refer to paragraph.29 for guidance on the appropriate method of reporting on the comparative financial statements. 3. AR section 300, Compilation Reports on Financial Statements Included in Certain Prescribed Forms establishes standards for reporting on comparative financial statements of a nonpublic entity when financial statements of one or more periods presented have been compiled and reported on or reviewed in accordance with AR section 100. This amendment revises AR section 300 by replacing the term nonpublic entity with nonissuer. This revision conforms to the terminology utilized by other standard setters, including the Auditing Standards Board. New language is shown in boldface italics; deleted language is shown by strikethrough..01 The requirements of AR section 100 and AR section 200 are applicable when the unaudited financial statements of a nonpublic entity nonissuer are included in a prescribed form. This statement amends AR section 100 and AR section 200 to provide for an alternative form of standard compilation report when the prescribed fn 13 In these circumstances, the accountant should refer to statements on auditing standards for guidance on the appropriate method of reporting on the comparative financial statements. [Footnote renumbered by the issuance of Statement on Standards for Accounting and Review Services No. 12, July 2005.] fn 14 If an unaudited disclaimer of opinion was previously issued on the financial statements of the prior period, it should not be reissued or referred to in the report on the financial statements of the current period. In these circumstances, the accountant should comply with the compilation or review standards in SSARS No. 1 [section 100] (or perform an audit) and report accordingly on the financial statements of the prior period. (However, see also paragraphs.34 to.36 concerning reporting during the transition period.) [Footnote renumbered by the issuance of Statement on Standards for Accounting and Review Services No. 12, July 2005.]

14 form or related instructions call for departure from generally accepted accounting principles by specifying a measurement principle not in conformity with generally accepted accounting principles or by failing to request the disclosures required by generally accepted accounting principles. fn 1 This Statement section also provides additional guidance applicable to reports on financial statements included in a prescribed form. fn 2.02 For purposes of this statement section, a prescribed form is any standard preprinted form designed or adopted by the body to which it is to be submitted, for example, forms used by industry trade associations, credit agencies, banks, and governmental and regulatory bodies other than those concerned with the sale or fn 1 For purposes of this Statement section, reference to generally accepted accounting principles includes, where applicable, a comprehensive basis of accounting other than generally accepted accounting principles as defined in AR section Disclosure of the basis of accounting should be made when a comprehensive basis of accounting other than generally accepted accounting principles is used. fn 2 This statement amends AR section 100 in four places. The following sentences are added to the end of AR section : Also, an accountant may be asked to compile financial statements included in a prescribed form that calls for departure from generally accepted accounting principles. AR section 300 provides additional guidance, including an alternative form of standard report, applicable to such compilation engagements. The following sentence is added to the end of AR section , footnote 18: However, see AR section 300 for guidance when such financial statements are included in a prescribed form and the prescribed form or related instructions do not request the disclosures required by generally accepted accounting principles. The following is added as the penultimate sentence of AR section : AR section 300 provides guidance when the departure is called for by a prescribed form or related instructions. The following is added as a footnote to the last sentence of AR section : AR section 300 permits an accountant who has reviewed the financial statements of a nonpublic entity to issue a compilation report on financial statements for the same period that are included in a prescribed form that calls for departure from generally accepted accounting principles. This statement also amends AR section , footnote 3 by adding the following sentence: See AR section 300 for additional guidance when the accountant compiles comparative financial statements included in a prescribed form that calls for departure from generally accepted accounting principles or, where applicable, from a comprehensive basis of accounting other than generally accepted accounting principles.

15 trading of securities. A form designed or adopted by the entity whose financial statements are to be compiled is not considered to be a prescribed form. The terms financial statement and nonpublic entity nonissuer are defined in paragraph 4 of SSARS No. 1 [section ], as amended AR section There is a presumption that the information required by a prescribed form is sufficient to meet the needs of the body that designed or adopted the form and that there is no need for that body to be advised of departures from generally accepted accounting principles required by the prescribed form or related instructions. Therefore, in the absence of a requirement or a request for a review report on the financial statements included in a prescribed form, the following form of standard compilation report may be used when the unaudited financial statements of a nonpublic entity nonissuer are included in a prescribed form that calls for departure from generally accepted accounting principles: I (we) have compiled the (identification of financial statements, including period covered and name of entity) included in the accompanying prescribed form in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. My (our) compilation was limited to presenting in the form prescribed by (name of body) information that is the representation of management (owners). I (we) have not audited or reviewed the financial statements referred to above and, accordingly, do not express an opinion or any other form of assurance on them. These financial statements (including related disclosures) are presented in accordance with the requirements of (name of body), which differ from generally accepted accounting principles. Accordingly, these financial statements are not designed for those who are not informed about such differences. 4. AR section 400, Communications Between Predecessor and Successor Accountants, provides guidance on communications between a predecessor and successor accountant when the successor accountant decides to communicate with the predecessor accountant regarding acceptance of an engagement to compile or review the financial statements of a nonpublic entity. This amendment revises AR section 400 by replacing the term nonpublic entity with nonissuer. This revision conforms to the terminology utilized by other standard setters, including the Auditing Standards Board. New language is shown in boldface italics; deleted language is shown by strikethrough..01 This statement provides guidance on communications between a predecessor and successor accountant when the successor accountant decides to communicate with the predecessor accountant regarding acceptance of an engagement to compile or review the financial statements of a nonpublic entitynonissuer. [fn 1] This statement [fn 1] [Footnote deleted by the issuance of Statement on Standards for Accounting and Review Services No. 9, November 2002.]

16 also provides guidance on inquiries a successor accountant may wish to make of a predecessor, and the predecessor s responses, to facilitate the conduct of the successor s compilation or review engagement. It also requires a successor accountant who becomes aware of information that leads him or her to believe the financial statements reported on by the predecessor accountant may require revision to request that the client communicate this information to the predecessor accountant. Subsequent and intervening paragraphs and footnotes are renumbered. 5. This amendment is effective upon issuance. Amendment to AR Section 100, Compilation and Review of Financial Statements (AICPA, Professional Standards, vol. 2, AR sec , ,.26.27,.31, and ) Clarification of Objectives of Compilation Engagement and Review Engagement 6. AR section includes a definition of compilation of financial statements. This amendment removes the definition of compilation of financial statements from paragraph and clarifies the objective of a compilation engagement as an engagement in which no assurance is provided and incorporating such objective in a new section entitled Objective of a Compilation Engagement. In addition, the illustrative engagement letter for a compilation of financial statements and the illustrative engagement letter for a compilation of financial statements not intended for third party use are revised to incorporate the stated objective. This amendment also removes the definition of review of financial statements from AR section ; revises and incorporates the objective of a review engagement in a new section entitled Objective of a Review Engagement; and revises AR section to state that, in a review engagement, the accountant must (1) apply analytical procedures to the financial statements; (2) make inquires of management or other company personnel, or both; and (3) obtain representations from management for all financial statements and periods covered by the accountant s review report. AR section is also revised to properly state the above requirement with respect to analytical procedures. New language is shown in boldface italics; deleted language is shown by strikethrough. Note that only those definitions in AR section that are revised, deleted, or added as a result of this amendment are reflected below. The revisions made pursuant to paragraph 1 of this proposed Statement on Standards for Accounting and Review Services are not reflected below. All other definitions are unchanged. Definitions.04 Certain terms are defined for purposes of this section as follows.

17 Compilation of financial statements. resenting in the form of financial statements fn 9 information that is the representation of management (owners) without undertaking to express any assurance on the statements. (The accountant might consider it necessary to perform other accounting services to compile the financial statements. See paragraph.08.) Review of financial statements. Performing inquiry and analytical procedures that provide the accountant with a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with GAAP or, if applicable, with OCBOA. (The accountant might consider it necessary to compile the financial statements or to perform other accounting services to enable him or her to perform a review. See paragraph.37.) The objective of a review differs significantly from the objective of a compilation. The inquiry and analytical procedures performed in a review should provide the accountant with a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the financial statements. No expression of assurance is contemplated in a compilation. The objective of a review also differs significantly from the objective of an audit of financial statements in accordance with generally accepted auditing standards (GAAS). The objective of an audit is to provide a reasonable basis for expressing an opinion regarding the financial statements taken as a whole. A review does not provide a basis for the expression of such an opinion because a review does not contemplate obtaining an understanding of internal control or assessing control risk; tests of accounting records and of responses to inquiries by obtaining corroborating evidential matter through inspection, observation, or confirmation; and certain other procedures ordinarily performed during an audit. A review may bring to the accountant s attention significant matters affecting the financial statements, but it does not provide assurance that the accountant will become aware of all significant matters that would be disclosed in an audit. Compilation of Financial Statements Objective of a Compilation Engagement.06 The objective of a compilation engagement is to present in the form of financial statements, information that is the representation of management (owners). The accountant provides no assurance on the financial statements Paragraphs are applicable to a compilation of financial statements, whenever the accountant Is engaged to report on compiled financial statements. Submits financial statements to a client that are or reasonably might fn 9 Paragraphs provide guidance to the accountant engaged to compile financial statements that omit substantially all the disclosures required by GAAP or OCBOA.

18 be expected to be used by a third party. Submits financial statements to a client that are not expected to be used by a third party. Limitations of a Compilation Engagement.12 A compilation differs significantly from a review or an audit of financial statements. A compilation does not contemplate performing inquiry, analytical procedures, and other procedures performed in a review nor obtaining an understanding of the entity s internal control; assessing fraud risk; tests of accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, the examination of cancelled checks or bank images; and other procedures ordinarily performed in an audit. Therefore, a compilation does not provide a basis for expressing any level of assurance on the financial statements being compiled. Review of Financial Statements Objective of a Review Engagement.28 The objective of a review engagement is to express limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with GAAP, or if applicable, with OCBOA. Review Performance Requirements Paragraphs.27 through.48 provide additional guidance applicable to a review of financial statements. In order to obtain a reasonable basis for the expression of limited assurance, the accountant must perform each of the following: Apply analytical procedures to the financial statements, as discussed in AR section Make inquiries of management and, when deemed appropriate, other company personnel, as discussed in AR section Obtain representations from management for all financial statements and periods covered by the accountant s review report, as discussed in AR section Procedures for conducting a review of financial statements generally are limited to analytical procedures, and inquiries. The accountant performs these procedures to obtain a basis for communicating whether he or she is aware of any material modifications that should be made to the financial statements for them to be in conformity with generally accepted accounting principles..30 The analytical and other procedures performed and the specific inquiries made and the analytical and other procedures performed should be tailored to the

19 engagement based on the accountant's knowledge of the entity's business. For example, if the accountant becomes aware of a significant change in the entity's operations, the accountant may consider making additional inquiries, employing additional analytical procedures, or both A review does not contemplate obtaining an understanding of internal control or assessing control risk,; assessing fraud risks,; tests of accounting records and of responses to inquiries by obtaining corroborating evidential matter performance of procedures designed to detect material misstatements due to fraud or illegal acts, and certain other procedures ordinarily performed during an audit. Thus, a review does not provide assurance that the accountant will become aware of all significant matters that would be disclosed in an audit. However, During the performance of the review procedures, the accountant may become aware that information coming to his or her attention is incorrect, incomplete, or otherwise unsatisfactory. If any evidence or information comes to the accountant s attention regarding or that fraud or an illegal act that may have occurred,. tthe accountant should request that management consider the effect of these matters on the financial statements. Additionally, the accountant should consider the effect of the matters on his or her review report. In circumstances where the accountant believes the financial statements are materially misstated, the accountant should perform the additional procedures deemed necessary to achieve limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with generally accepted accounting principles, or if applicable, OCBOA. (See paragraph.46.51) for guidance when an accountant is unable to complete a review and paragraphs for the accountant's responsibilities when he or she is aware of departures from generally accepted accounting principles.) Limitations of a Review Engagement.32 A review differs significantly from an audit of financial statements because a review does not provide a reasonable basis for expressing an opinion regarding the financial statements taken as a whole. A review does not contemplate obtaining an understanding of the entity s internal control; assessing fraud risk; tests of accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, the examination of cancelled checks or bank images; and other procedures ordinarily performed in an audit. Analytical Procedures In a review engagement, The the accountant should must apply analytical procedures to the financial statements. The purpose of analytical procedures is to identify and provide a basis for inquiry about the relationships and individual items that appear to be unusual and that may indicate a material misstatement. Analytical procedures should include:

20 Developing expectations by identifying and using plausible relationships that are reasonably expected to exist based on the accountant's understanding of the entity and the industry in which the entity operates. Comparing recorded amounts, or ratios developed from recorded amounts, to expectations developed by the accountant. See Appendix I [paragraph ] for examples of analytical procedures an accountant may consider performing when conducting a review of financial statements. Subsequent and intervening paragraphs and footnotes are renumbered. Appendix C Compilation of Financial Statements Illustrative Engagement Letter [Appropriate Salutation] This letter is to confirm our understanding of the terms and objectives of our engagement and the nature and limitations of the services we will provide. We will perform the following services: We will compile, from information you provide, the annual [and interim, if applicable] balance sheet and related statements of income, retained earnings, and cash flows of XYZ Company for the year 20XX. We will compile the financial statements and issue an accountant s report thereon in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. A compilation is limited to presenting, in the form of financial statements, information that is the representation of management. The objective of a compilation is to present in the form of financial statements, information that is the representation of management (owners) without undertaking to express any assurance on the financial statements. We will not audit or review the financial statements and, accordingly, will not express an opinion or any other form of assurance on them. A compilation differs significantly from a review or an audit of financial statements. A compilation does not contemplate performing inquiry, analytical procedures, and other procedures performed in a review nor obtaining an understanding of the entity s internal control; assessing fraud risk; tests of accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, the examination of cancelled checks or bank images; and other procedures ordinarily performed in an audit. Therefore, a compilation does not provide a basis for expressing any level of assurance on the financial statements being compiled.

21 Our engagement cannot be relied upon to disclose errors, fraud, or illegal acts that may exist. However, we will inform the appropriate level of management of any material errors, and of any evidence or information that comes to our attention during the performance of our compilation procedures, that fraud may have occurred. In addition, we will report to you any evidence or information that comes to our attention during the performance of our compilation procedures regarding illegal acts that may have occurred, unless they are clearly inconsequential. As part of our engagement, we will also (list any nonattest services to be performed, if applicable, such as income tax preparation and bookkeeping services). You are responsible for: a. Making all management decisions and performing all management functions; b. Designating an individual who possesses suitable skill, knowledge, and/or experience, preferably within senior management, to oversee the services; c. Evaluating the adequacy and results of the services performed; d. Accepting responsibility for the results of the services; and e. Establishing and maintaining internal controls, including monitoring ongoing activities. If, for any reason, we are unable to complete the compilation of your financial statements, we will not issue a report on such statements as a result of this engagement. Our fees for these services.... We will be pleased to discuss this letter with you at any time. If the foregoing is in accordance with your understanding, please sign the copy of this letter in the space provided and return it to us. fn * Sincerely yours, [Signature of accountant] Acknowledged: fn * Some accountants prefer not to obtain an acknowledgment, in which case their letter would omit the paragraph beginning, If the foregoing and the spaces for the acknowledgment. The first paragraph of their letter might begin as follows: This letter sets forth our understanding of the terms and objectives of our engagement

22 XYZ Company President Date Appendix D Compilation of Financial Statements Not Intended for Third Party Use Illustrative Engagement Letter [Appropriate Salutation] This letter is to confirm our understanding of the terms and objectives of our engagement and the nature and limitations of the services we will provide. We will perform the following services: We will compile, from information you provide, the [monthly, quarterly, or other frequency] financial statements of XYZ Company for the year 20XX. We will compile the financial statements in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. A compilation is limited to presenting, in the form of financial statements, information that is the representation of management. The objective of a compilation engagement is to present in the form of financial statements, information that is the representation of management (owners) without undertaking to express any assurance on the financial statements. We will not audit or review the financial statements and, accordingly, will not express an opinion or any other form of assurance on them. A compilation differs significantly from a review or an audit of financial statements. A compilation does not contemplate performing inquiry, analytical procedures, and other procedures performed in a review nor obtaining an understanding of the entity s internal control; assessing fraud risk; tests of accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, the examination of cancelled checks or bank images; and other procedures ordinarily performed in an audit. Therefore, a compilation does not provide a basis for expressing any level of assurance on the financial statements being compiled. The financial statements will not be accompanied by a report. Based upon our discussions with you, these statements are for management's use only and are not intended for thirdparty use.

23 Material departures from generally accepted accounting principles (GAAP) or other comprehensive basis of accounting (OCBOA) may exist and the effects of those departures, if any, on the financial statements may not be disclosed. In addition substantially all disclosures required by GAAP or OCBOA may be omitted. (The accountant may wish to identify known departures.) Notwithstanding these limitations, you represent that you have knowledge about the nature of the procedures applied and the basis of accounting and assumptions used in the preparation of the financial statements that allows you to place the financial information in the proper context. Further, you represent and agree that the use of the financial statements will be limited to members of management with similar knowledge. The financial statements are intended solely for the information and use of [include list of specified members of management] and are not intended to be and should not be used by any other party [optional]. Our engagement cannot be relied upon to disclose errors, fraud, or illegal acts that may exist. However, we will inform the appropriate level of management of any material errors and of any evidence or information that comes to our attention during the performance of our compilation procedures, that fraud may have occurred. In addition, we will report to you any evidence or information that comes to our attention during the performance of our compilation procedures, regarding illegal acts that may have occurred unless they are clearly inconsequential. We are not independent with respect to [name of entity] [if applicable]. As part of our engagement, we will also (list any nonattest services to be provided, if applicable, such as income tax preparation and bookkeeping services). You are responsible for: a. Making all management decisions and performing all management functions; b. Designating an individual who possesses suitable skill, knowledge, and/or experience, preferably within senior management, to oversee the services; c. Evaluating the adequacy and results of the services performed; d. Accepting responsibility for the results of the services; and e. Establishing and maintaining internal controls, including monitoring ongoing activities. The other data accompanying the financial statements are presented only for supplementary analysis purposes and will be compiled from information that is the representation of management, without audit or review, and we do not express an opinion or any other form of assurance on such data [if applicable]. Our fees for these services